The Effect of Interest Rates Volatility on the Growth of Real Estate Market in Kenya

Abstract

The purpose of the study was to portray the effect of interest rates volatility on the growth of real estate market in Kenya. The real estate sector being one of the major sectors of the economy in Kenya has been largely affected by fluctuating interest rates. The study sort to show case this effect by showing how growth of real estate market is affected by the interest rates volatility. Real estate is a large investment which requires huge capital that most ordinary Kenyans cannot raise, therefore they turn to banks to finance this cost of construction or purchase. The cost of borrowing in all banks is driven by the real interest rate which is fuelled or largely accommodates inflation. Inflation is the key driver of interest rates.

The research problem was analysed through the use of the regression model. The target population of this study was the real estate market in the country ranging from the large real estate developers to the small scale individual investors. Data for the purpose of the study was collected from KNBS and Hass Consulting firm from 2008-2012. Study findings indicated that the interest market has experienced low volatility. Thus, volatility in the interest market is predictable, at least in the short run. The evidence strongly indicates that the interest rate market is nonlinear. The following recommendation was made, that the investors should consider investing in the real estate market despite the erratic interest rates.